February 02, 2011

Forecast Forensics: The Basics

Remember, you want to pay attention to Forecast Forensics if you are responsible for forecasting sales levels in 2011, 2012, 2013, 2014, and 2015 at your company.

Here's the basics ... you start with a population of customers, and this population of customers has a likelihood of buying something in the next year.  Take a look at the handwritten image below for details (click on it to make it bigger):

In our example, we start with 1,000 customers.  400 customers choose to buy again (40% retention or "rebuy" rate).
  • 50 spend an average of $800.
  • 175 spend an average of $600.
  • 100 spend an average of $400.
  • 40 spend an average of $200.
  • 35 spend an average of $100.
  • Total Spend = $196,500.
This is the process we go through in a Forecast Forensics project.  We calculate the probability of a customer purchasing again in the next year (or month if you're a subscription-based business).  If the customer purchases, we calculate the probability of the customer being a high-value customer (grade = A), or a low-value customer (grade = F).  The value of the customer determines the likelihood of the customer buying again in the next year.

Once we migrate customers into next year's grade (50 = A, 175 = B, 100 = C, 40 = D, 35 = F), we replicate the process ... we add new customers into the mix, we estimate whether lapsed customers buy again, we apply spending amounts to each customer grade, and we're set!

Now, grades can also mean "channel preference" ... we can identify the channels that customers prefer ... we'll get more interesting outcomes looking at the world this way ... we can see how, for instance, mobile influences the future of our business.

We iterate through this process for each of the next five years, yielding a sales forecast.

In upcoming editions of "Forecast Forensics", we'll walk through a series of examples, so that you can understand how to forecast the future trajectory of your business.

And if you're a CEO/CFO/VP-Marketing, looking to understand how your business is likely to evolve in the future, then take advantage of an introductory price for the first three clients.  Or if you're an owner looking to sell your business, sign up now:

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